As it relates to the R&D tax credit, perhaps no three letters have ever been more feared than A-M-T; otherwise known as the dreaded Alternative Minimum Tax.
Why so much fear?
Historically, the R&D tax credit could not be used to offset AMT. This means that even if a company was conducting qualifying research activities and calculating a credit on its tax return, the company would not be able to utilize the credit against its full tax liability if it was subject to AMT. As you could imagine, many businesses found it difficult to justify the work involved in calculating the credit when only a portion, if any of that credit would be available for their immediate use. And until recently – this was a very common scenario.
So What’s Changed?
Welcome to the Tax Cuts and Jobs Act of 2017! As it relates to AMT and its impact on the research credit, taxpayers have much to gain from the new reform Act. Let’s examine why:
Repeal of Corporate AMT:
Thanks to the new tax reform Act, AMT was repealed for corporations, effective for tax years ending after December 31, 2017.
This means that eligible corporations once impacted by AMT will finally have opportunity to utilize the research credit. This change in tax law will undoubtedly create an immediate increase in utilization of the credit for many corporations.
*Note: Your general business credit is limited to your net income tax minus 25% of your net regular tax liability that is more than $25,000.
Increased Exemption Amounts for Individuals:
In addition to the full repeal of corporate AMT, the AMT exemption amounts for individual taxpayers were also increased. In some cases, this will reduce the applicability of the AMT altogether, thus increasing the ability to utilize Research Credits.
The AMT exemption amounts are scheduled to increase to $70,300 for single filers and $109,400 for joint filers; with a phase out for those taxpayers at $500,000 and $1 million, respectively.
*Note: These increases are effective only through 2025.
Preservation of the PATH ACT provisions:
It’s important to note that under the new tax reform Act, the research tax credit was fully preserved. This means that the many recent favorable enactments to the research credit are still available to taxpayers today. And as it relates to AMT, we can’t ignore the very favorable provision that came out of the PATH Act of 2015.
Under the PATH Act, certain eligible small business taxpayers were given the ability to utilize the Research credit to offset AMT. More specifically, IRC Section 38(c)(5)(C) defined an “eligible small business” as a corporation without publically traded stock, a partnership or a sole proprietorship, whose average average annual gross receipts – and gross receipts for the 3-taxable-year period preceding such taxable years – did not exceed $50 Million.
Beginning in 2016, businesses meeting the above criteria have been eligible to utilize the research credit to offset AMT. (For further detail, check out our prior blog post on this topic.)
Note: Credits determined with respect to a partnership or S corporation shall not be treated as eligible small business credits by any partner or shareholder unless such partner or shareholder meets the gross receipts test under subparagraph (C) for the taxable year in which such credits are treated as current year business credits.
As you can see, many taxpayers once impacted by AMT will finally be able to benefit from the utilization of the research credit. This is great news for the many U.S. businesses who are working to develop new and improved products and processes.